Download Introduction - ePublications@bond

MISTAKEN PAYMENTS - THE RIGHT OF RECOVERY
AND THE DEFENCES
By
Kwai-Lian Liew*
Assistant Professor of Law
Bond University
Introduction
Suppose ABC Bank wrongly followed instructions of customer A.
Instead of paying recipient Bank X where A had an account, ABC Bank paid
Bank Y where A also happened to have an account. Can ABC Bank recover the
payment from Bank Y? Consider another scenario: customer B had instructed
ABC Bank to pay $50,000 to recipient Z. By virtue of a computer error, Z was
credited with $500,000. Is ABC Bank able to seek restitution from Z?
In 1987, the High Court in ANZ Group Ltd v Westpac Banking
Corporation1 clarified two very important questions about the right of recovery
for money paid under mistake of fact. It said that the plaintiffs did not have to
show that they paid under a supposed liability to pay nor did they have to show
that the mistake was one that had to be shared by the payee. Furthermore, the
High Court recognised that the basis for recovery should no longer be regarded
as lying in implied contracts but rather, on the basis of restitution or unjust
enrichment. The joint judgment of Mason CJ, Wilson, Deane, Toohey and
Gaudron JJ said:2
In other words, receipt of a payment which has been made under a fundamental
mistake is one of the categories of case in which the facts give rise to a prima
facie obligation to make restitution, in the sense of compensation for the
benefit of unjust enrichment, to the person who has sustained the countervailing
detriment.
In the ANZ Banking Group case, the High Court left open the questions
whether the mistake of fact must be categorised as a fundamental mistake or
whether it is sufficient that the mistake caused the payment. These questions
were answered in David Securities Pty Ltd v Commonwealth Bank of
Australia3 where the High Court answered the first question in the negative and
the second in the affirmative. Furthermore, the court took the opportunity to
abolish the archaic rule that denied recovery of money paid under a mistake of
law. This paper seeks to examine the right of recovery of payments made under
mistake of law with particular emphasis on the defences which may be
*
1
2
3
LLB(Hons)(Adelaide)LLM(Hons)(Cambridge). I am grateful to Professor Andrew Burrows, Law
Commissioner, London for his helpful comments on an earlier draft.
(1987) 164 CLR 662.
Ibid at 673.
(1992) 175 CLR 353; 109 ALR 57.
95
(1995) 7 BOND L R
available to a recipient of such mistaken payments.
The Mistake of Law Rule
Until the decision of the High Court in David Securities,4 Australian
courts had followed Bilbie v Lumley5 where Lord Ellenborough CJ refused
recovery of money paid under a mistake of law on the ground that 'every man
must be assumed to know the law otherwise there is no saying to what extent
the excuse of ignorance might not be carried'.6 In Bilbie, the insured had
withheld a material fact from the underwriter but this was later disclosed before
a claim was made by the insured. This fact would have entitled the underwriter
to rescind the insurance contract for non disclosure of material facts at the time
of contract. Not realising the existence of this legal right, the underwriter settled
an insurance claim with the insured and later brought an action of indebitatus
assumpsit at common law to recover the money paid pursuant to the settlement.
Goff and Jones7 take the view that the decision reached by the court in
Bilbie v Lumley was, on the facts of the case, one based on a sound rule of policy
that a payment made in settlement of an honest claim ought to be irrecoverable.
Bilbie v Lumley is therefore not a case to support the proposition that payments
made in mistakes of law are irrecoverable;8 rather, the principle in that case is
to preclude recovery of payments made in settlement of an honest claim.9 Any
other payments made under a mistake of law should be recoverable if it would
have been recoverable had the mistake been one of fact.
The fact and law distinction for the recovery of money paid under
mistake is now of academic interest only since the High Court's seminal
decision in David Securities. In that case, the plaintiffs, David Securities Pty
Ltd ('David Securities') and other related companies, entered into a loan
agreement with the defendant, the Commonwealth Bank of Australia ('the
bank'). The loan agreement provided, inter alia, for interest to be paid to the
bank by David Securities, the borrower, 'without deduction of any tax or duty
or other imposts of any kind whatsoever' (clause 8(b)). It further purported to
require the borrower, if obliged by law to deduct any such taxes, duties or
imposts from any payment to be made by it to the bank, to pay such 'additional
amounts' as may be necessary to ensure payment in full to the bank. It was held
that the operation of this clause contravened s 261(1) of the Income Tax
Assessment Act 1936 (Cth) ('ITAA') and it was therefore void. Section 261 of
the ITAA provides that:
4
5
6
7
8
9
96
See discussions of this case and the mistake of law rule generally in: Michael Bryan, 'Mistaken
Payments and the Law of Unjust Enrichment: David Securities Pty Ltd v Commonwealth Bank of
Australia' (1993) 15 Syd LR 461; A Burrows, 'Restitution For Mistake in Australia' (1993) 13 OJLS
584; K-L Liew, 'Recovery of Moneys Paid Under a Mistake of Law: The Australian Approach'
(1993) 6 CBLJ 157; Peter Birks, 'Modernising The Law of Restitution' (1993) 109 LQR 164.
(1802) 2 East 469 (102 ER 448).
(1802) 2 East 469 at 472 (102 ER 448 at 449-450).
The Law of Restitution (Sweet & Maxwell, 4th ed 1986, London) at p 118-119.
Ibid at 119.
The issue of payments made in settlement of an honest claim is discussed below.
MISTAKEN PAYMENTS - THE RIGHT OF RECOVERY AND THE DEFENCES
A covenant or stipulation in a mortgage, which has or purports to have the
purpose or effect of imposing on the mortgagor the obligation of paying
income tax on the interest to be paid under the mortgage ... shall be absolutely
void.
The court concluded that the loan agreement was collateral to the
securities taken by the bank to secure the loan and thus fell within the definition
of 'mortgage' (defined in clause 5 of the agreement) which includes 'any charge,
lien or encumbrance to secure the repayment of money, and any collateral or
supplementary agreement'.10 The effect of clause 8(b) imposed a financial
burden on the plaintiff to pay 'additional amounts' without discount to the
defendant. It was thus avoided by virtue of s 261(1) of the ITAA. The plaintiff
thus sought recovery of the payments.
On appeal to the High Court, Mason CJ, Deane, Toohey, Gaudron and
McHugh JJ gave a joint judgment (hereafter referred to as 'the majority'),
Brennan and Dawson JJ each gave a separate judgment. The majority stated
that the general rule which precluded the recovery of money paid under a
mistake of law did not form part of the law of Australia. Consequently, the
present rule for recovery of mistaken payment is as follows:
... the payer will be entitled prima facie to recover moneys paid under a
mistake if it appears that the moneys were paid by the payer in the mistaken
belief that he or she was under a legal obligation to pay the moneys or that the
payee was legally entitled to payment of the moneys. Such a mistake would
11
be causative of the payment.
Voluntary Payments and Mistake of Law
Although the High Court has abolished the distinction between mistake
of fact and mistake of law, this distinction may still have a practical significance
because the majority in that case made a deliberate effort to distinguish between
payments made under a mistake of law and those made voluntarily in submission
to an honest claim. Their Honours said that a payment made voluntarily in
submission to an honest claim - where the payer is prepared to make the
payment irrespective of the validity or invalidity of the obligation, rather than
contest the claim for payment - would not be recoverable on the basis that the
courts would uphold compromises freely entered into between the parties.
Cases involving voluntary payments made in submission to a claim will
be more likely to arise in the context of mistake of law rather than mistake of
fact. As Goff and Jones in The Law of Restitution12 pointed out:
The essential difference between a restitutionary claim arising from a mistake
of law rather than of fact is that the limiting principle, that benefits conferred
10
11
12
The discussion of what amounts to a 'collateral contract' is beyond the scope of this paper.
(1992) 175 CLR 353 at p 378. The matter was remitted to the primary judge to enable him to
reconsider David Securities' application to call evidence on the issue of mistake.
Goff and Jones, The Law of Restitution (Sweet & Maxwell, 4th ed 1986, London) at p 144.
97
(1995) 7 BOND L R
in submission to an honest claim are irrevocable, assumes considerable
importance if the payer's mistake is one of law. But it is in rare cases that a
plaintiff’s claim is defeated because he has voluntarily assumed the risk of his
own mistake of fact.
One of the cases which involved 'voluntary submissions' is South
Australian Cold Stores Ltd v Electricity Trust of South Australia.13 In that case,
the plaintiff paid electricity charges to the defendant at an increased rate and
later successfully challenged the validity of the Minister's order in increasing
the charges. The plaintiff's claim to recover these excessive charges paid to the
defendant was, however, not successful. This was so despite the fact that the
plaintiff had objected to the increase prior to making the payments. The court,
in denying recovery, said that the plaintiff had paid the increase on the
supposition that the demand was lawfully made. The case also fell outside the
rule allowing for recovery of payment made under a mistake of fact. There was
no mistake of law either because the plaintiff company was prepared to make
the payments without investigating the lawfulness of the demand. It had
assumed that the Trust was entitled to charge the higher rates and thus it had
voluntarily submitted to the claim of the Trust.
The High Court in David Securities defined 'voluntary' payment as
follows:14
The payment is voluntary or there is an election if the plaintiff chooses to
make the payment even though he or she believes a particular law or
contractual provisions requiring the payment is, or may be, invalid, or is not
concerned to query whether payment is legally required, he or she is prepared
to assume the validity of the obligation, or is prepared to make the payment
irrespective of the validity or invalidity of the obligation, rather than contest
the claim for payment.
Where payments have been made under such 'voluntary' circumstances,
the court said, they were made in satisfaction of an honest claim. This definition
of voluntary payments is perhaps stated too broadly. It may remove any
advantage that may be gained from the abolition of the mistake of law rule. It
is also unfortunate that reference was made to the phrase 'submission to an
honest claim'. The definition of 'voluntary payment' ought to be wide enough
to include cases of voluntary payments where no legal 'claim' has been made
and payments which might be sought to be recovered could have been paid in
circumstances which did not involve a threat of litigation.15 It is better to talk
of distinguishing between payments made voluntarily or by election (and
therefore irrecoverable) and those made under a mistake of law (recoverable).16
13
14
15
16
98
(1957) 98 CLR 65.
Above n 1 at 373-4.
Instances of such cases are payments made pursuant to a demand from a public authority without an
immediate threat to litigation. Note the case of Woolwich Equitable Building Society v
Commissioners of Inland Revenue [1993] AC 70 where the House of Lords decided that a public
authority comes under a restitutionary obligation to return a levy demanded without parliamentary
authority. This obligation rests entirely on the ultra vires character of the demand rather than
whether Woolwich was mistaken as to the legality of the payment.
Support for this can be found in: Burrows A, 'Restitution for Mistake in Australia' [1993] 13 OJLS
584 at 586.
MISTAKEN PAYMENTS - THE RIGHT OF RECOVERY AND THE DEFENCES
On the question of voluntariness, where a party to a contract makes a
claim on the other party and threatens to bring legal proceedings unless the
latter pays a certain sum of money, the payer may elect to pay in order to settle
the claim. Such payments are regarded properly as voluntary payments. An
example here is the claim by an insured against an insurance company pursuant
to an insurance policy. The insurance company may doubt the validity of the
claim by the insured in which case it has the option to investigate the claim
further but if it chooses to pay so as to avoid litigation, the payment must be
regarded as voluntary. If, however, the insurance company pays without
thinking about the validity of the claim, the payment cannot be said to have been
paid voluntarily in submission to the claim. A payment made under a mistake
of law is not necessarily voluntary simply because there is absence of duress,
inducement or compulsion.17 If one is ignorant of the possibility of the claim
being invalid, or simply fails to consider its validity, it is hard to say that these
payments were made in satisfaction of an honest claim. One cannot submit to
any claim unless one is aware of one's legal rights. More is required to show that
a payer has paid in submission to a claim.18 This point is particularly apposite
in the context of ultra vires payments to a governmental authority. Although
David Securities was concerned with payments made pursuant to a contract
between private individuals and not with payments made pursuant to an ultra
vires demand by a governmental authority, the principle enunciated in that
case, in the writer's view, is wide enough to cover the ultra vires payment
cases.19 These payments are clearly made under a mistake of law - if the payer
had known that the demand did not have to be complied with because it was
beyond the power of the relevant authority to make such a demand, then the
payer would not have made the payment. Recovery of such payments should
thus be allowed.
A distinction should therefore be drawn between a case where a party
pays money to another pursuant to, for instance, a contractual provision under
some doubts as to the validity of the provision but nevertheless agrees to pay
because it wishes to close the transaction, and the situation where the payer may
not have thought about the validity of the provision at all but pays because he
or she has assumed the validity of the provision. This would not be unusual in
commercial transactions particularly in cases where parties to a contract have
negotiated on terms which are later found to be invalid or illegal. Dawson J in
David Securities20 took the view that the correct approach is to ask whether the
plaintiffs had turned their minds to the question of their legal obligation to pay
at the time of payment. If they paid merely because the contract had provided
17
18
19
20
[1992] 109 ALR 57 at 96, per Dawson J.
Support for this can be found in the judgment of the majority in David Securities where their honours
said that the concept of 'mistake of law' includes cases of sheer ignorance as well as cases of positive
but incorrect belief, see: (1992) 175 CLR 353 at 374.
Woolwich Equitable Building Society v Commissioners of Inland Revenue [1993] 1 AC 70 where the
court held that payments made pursuant to an ultra vires demand could be recovered based on the
constitutional principle that there should be no taxation without parliament. The question of
voluntariness is not relevant as the payment is prima facie recoverable, subject to defences, simply
because the demand was ultra vires. For an analysis of the Woolwich case, see: Beatson, 'Restitution
of Taxes, Levies And Other Imports: Defining The Extent of the Woolwich Principle' (1993) 109
LQR 401.
(1992) 175 CLR 353.
99
(1995) 7 BOND L R
for such payments21 and not because of a mistaken belief in the enforceability
of the provision, then no recovery should be allowed. These payments were
made voluntarily and not because of any mistake of law. On this point, Dawson
J said that:22
A payment made in those circumstances is made voluntarily and even if it
turns out that there was no legal obligation to make that payment, it does not
seem to me that it can be said that the payment was made under a mistake of
law. Indeed, it cannot necessarily be said that, even if the payer had turned his
mind to the question of law, he would not have made the payment. Some
contractual obligations are commonly performed in the knowledge that they
are not binding and not every question of law can be answered so clearly or
definitely as to warrant the resistance of an honest claim for payment.
There is merit in this approach because it places the onus on the
plaintiffs to show that they had indeed made the payments under a mistake; that
is, they must show that but for the mistaken belief in the validity of the relevant
provision in the contract, they would not have paid. This of course is a question
of fact.
Assumptions of Risk and Negligence
At the end of the day, the real question, it is submitted, is whether the
payer, knowing the possibility of mistake, nevertheless elected to assume a risk
of mistake and paid. If that is the case, even if there was a mistake, the payer
had elected to assume the risk of a mistake and recovery should therefore not
be allowed. The approach taken by Dawson J is not without difficulties. It may
result in denying a restitutionary claim to a payer who did not even address his
or her mind to the possibility that there might have been no legal obligation to
pay; or to one who would not have paid had he or she known that there was no
legal obligation to pay.
Where the payment is paid as a result of a compromise, no doubt
recovery should be denied if subsequently it transpires that there is no legal
substance to the claim. This result could be explained on the policy ground that
bona fide compromises should be upheld, or, alternatively, the payment was
not caused by any mistake. The payment was paid with the intention of settling
the claim.23 The payer has a right to contest the claim but if he or she elects not
to adopt that option, then he or she cannot seek to recover any payments made
in settling the claim even though, if he or she had contested the claim, the law
would have been in his or her favour. These were not mistaken payments.24
21
22
23
24
100
Parties who have negotiated a contract at arms' length must be taken to have agreed to the terms of
the contract. They would not have agreed to be bound by the terms of the contract if there was no
quid pro quo.
(1992) 175 CLR 353 at 403.
New York Life Insurance Co v Chittenden 112 NW 96 (1907); see Goff and Jones at 106.
See Latham CJ in Werrin v The Commonwealth (1938) 59 CLR 150 at p 159 where he said:
The principle appears to me to be quite clear that if a person, instead of contesting a claim, elects to
pay money in order to discharge it, he cannot thereafter, because he finds out that he might have
successfully contested the claim, recover the money which he so paid merely on the ground that he
made a mistake of law.
MISTAKEN PAYMENTS - THE RIGHT OF RECOVERY AND THE DEFENCES
In Goff and Jones' discussion of submission to an honest claim,
reference was made to some United States authorities which based their
decision on the notion of 'assumption of risk'.25 If the plaintiff paid in
circumstances where it had assumed a risk that payments may not have been
legally enforceable, then the payment was a voluntary one and was not vitiated
by any mistake. Goff and Jones observe that this notion of 'assumption of risk'
has been rejected by some jurisdictions in the United States and that much
depends on the circumstances in which the payment was made. In the writer's
view, this 'assumption of risk' argument is one which ought to be explored
further both academically and judicially in Australia. If a financial institution
makes a payment without checking whether the payee is legally entitled to
payment, it could be said that it had assumed a risk that the payment was an
unnecessary payment.26 The factors which ought to be taken into account
include: whether the payer was aware of facts or circumstances which would
put the payer on enquiry and whether the payer has waived the right to further
investigations of the facts; whether the payee has threatened to bring legal
proceedings against the payer in respect of the money claimed27 and whether
there was an element of doubt in the mind of the payer at the time of
payment.28 If the payer had doubts as to the validity of the demand for payment
but nevertheless paid, it can be said that he or she had waived the right to further
investigation or had accepted the risk of mistake. The difficulty here, as noted
by Burrows,29 is in assessing the degree of doubt in the mind of the payer. To
what extent must the doubt be such as to deny any claim of a mistaken payment?
It has been suggested that the best approach is to apply the balance of
probabilities test:
If the payer pays believing that the facts are probably not what they in truth
are (ie he is 51% mistaken) he can recover for mistake: otherwise his doubts
preclude restitution for mistake either on the grounds that he was not mistaken
30
or that he took the risk of his mistake.
The writer agrees that this balance of probabilities test is appropriate as
a general test on the state of mind of the payer at the time of payment, that is,
it ought to be used in determining whether the payer thought (mistakenly) he
was under a legal obligation to pay or whether he had doubts as to the validity
of the claim but nevertheless chose to pay in which case recovery ought to be
denied. Although this test could be criticised on the basis that it is difficult to
assess a person's state of mind, this difficulty is not limited to cases of mistaken
payment. In the context of a misrepresentation of fact, Lord Justice Bowen had
said that a person's state of mind is 'as much a fact as the state of his
25
26
27
28
29
30
See Goff and Jones, The Law of Restitution (Sweet and Maxwell, 3rd ed, 1986) beginning at p 105.
See also: New York Life Insurance Co v Chittenden 134 Iowa 613, 112 N W 96 (1907).
See Cam Sons Pty Ltd v Ramsay (1960) 104 CLR 247; M Bryan, 'Mistaken Payments and The Law of
Unjust Enrichment: David Securities Pty Ltd v Commonwealth Bank of Australia', above n 4.
Goff and Jones, above n 10 at p 107.
See Maskell v Horner [1915] 3 KB 106; A Burrows, The Law of Restitution (Butterworths, 1993) at
102.
A Burrows, The Law of Restitution (Butterworths, 1993) at 102.
Ibid.
101
(1995) 7 BOND L R
digestion.'31 It may be difficult to prove but it is a question of fact which can be
ascertained objectively.
As far as the distinction between payments made under a mistake of law
and those which the payer had voluntarily paid or elected to pay, the following
proposition is suggested: a payment is not vitiated by a mistake of law if the
payment is made in circumstances where the payer doubts the validity of the
demand but chooses to assume a risk of mistake. In such cases, even if there was
a mistake, the mistake was not the cause of the payment. Where the payer has
not directed his or her mind to the validity of the demand but has nevertheless
paid on the assumption of validity, then the payment ought to be recoverable.
The concept of mistake of law includes cases of ignorance of the law.32
There is one further issue which needs to be considered in this context
- the issue of negligence of the payer. Can it be said that a payer who has
negligently paid the payee without investigating the true facts or legality of the
demand is estopped from relying on mistake as a ground for recovery? There
was an early dictum by Bayley J in Milnes v Duncan33 that an omission by the
payer to avail himself of the means of knowledge of the real facts could
preclude him from recovery. In that case, the relevant bill of exchange was
drawn in Ireland. The stamp duties payable on bills drawn in Ireland was less
than that payable in England. By various indorsements, the bill was endorsed
to the defendant in England who neglected to present the bill until one month
after it was due. The acceptor of the bill had, in the meantime, become bankrupt.
The defendant sought payment from the indorser of the bill (the plaintiff) who
argued that the former could not seek payment when it was his own delay to
seek payment from the acceptor that caused his loss. The defendant threatened
to sue the plaintiff, alleging that the bill was void on the ground that it was
insufficiently stamped. The plaintiff inspected the bill and found that the bill
was in fact insufficiently stamped - not knowing that the bill was in fact drawn
in Ireland. There was nothing on the face of the bill to show that it was drawn
in Ireland. The plaintiff paid the defendant and later sought to recover the
amount. The court allowed the plaintiff to recover because it was paid under a
mistake or rather, ignorance, of the facts. Bayley J said:
If it had appeared on the face of the bill to have been drawn in Ireland, there
would perhaps have been laches on his part in making the payment, under an
idea that the bill was drawn in England and had improper stamp, when he
might by due inquiry of the prior indorser have learnt that the bill was drawn
in Ireland and was a valid bill. But neither the date nor the indorsements were
calculated to raise in the mind of any person who saw the bill any suspicion
34
that it was drawn in England.
It is implicit in Bayley J's dictum that if there was a reason which ought
to raise suspicion in the mind of the payer prior to payment, the payer ought to
31
32
33
34
102
Edgington v Fitzmaurice (1885) 29 Ch D 459 at 483.
See above n 18.
(1827) 6 B & C 671 at 677; 108 ER 598 at 600.
108 ER 598 at 601.
MISTAKEN PAYMENTS - THE RIGHT OF RECOVERY AND THE DEFENCES
have investigated further. He concluded that the payer had no adequate means
of knowing that the bill was not a void bill on the facts and therefore was entitled
to recovery.
In Kelly v Solari,35 Parke B criticised the dictum of Bayley J in Milnes
v Duncan and said that if money 'is paid under the impression of the truth of a
fact which is untrue, it may, generally speaking, be recovered back, however
careless the party paying may have been, in omitting to use due diligence to
inquire into the fact.'36 In the same passage, however, Parke B said that if money
is intentionally paid without reference to the truth or falsehood of the fact, and
the payer waives all inquiry into the legitimacy of the payment, then the payee
is entitled to retain it. A distinction seems to be drawn between mere negligence
and complete recklessness. This seems to be the position taken by the Appellate
Division of the Supreme Court of South Africa in Willis Faber Enthoven (Pty)
Ltd v Receiver of Revenue and Another37 where the court said that recovery for
money paid under mistake may be denied where the conduct of the payer was
found to have been inexcusably slack. The court refrained from defining the
circumstances in which error of law could be said to be inexcusable since much
would depend on the relation between the parties; the conduct of the defendant;
the plaintiff's state of mind and the culpability of his or her ignorance in making
the payment. Professor Jones has commented that most jurisdictions which
grant relief for payments made under mistake of law have limited the right to
recovery in cases where, for example, the payer had assumed a risk of
mistake.38 He took the view, correctly in the writer's view, that excusability of
error is an inherently uncertain concept. For example, what steps must the payer
have taken before one can excuse his mistake? When is his or her mistake nonexcusable? What seems clear, however, is that only a high degree of negligence
- more than mere negligence on the part of the payer should preclude him or her
from recovery. In cases of complete recklessness, it is arguable that a payer who
was reckless in making the payment and chose not to investigate cases of
suspicion, did not make the payment by mistake. The issue is not one of
negligence but one of assumption of risk of error.
The triumph of the causative test
The majority in David Securities said that it would be logical to treat
cases involving mistake of law in the same way as those involving mistake of
fact. Consequently, payments made would be recoverable if they would not
have been made had the plaintiff payer known of the true legal position, that is,
but for the mistake regarding the validity of the claim no payments would have
been made.39 Their Honours accepted the position that there is a prima facie
right of restitution where a mistake of fact or law caused the payer to make the
35
36
37
38
39
(1841) 9 M & W 54.
Ibid at 59. Kelly v Solari has been applied in subsequent cases including R E Jones Ltd v Waring &
Gillow Ltd [1926] AC 670.
1992 (4) SA 202.
Gareth Jones, 'Payments of Money Under Mistake of Law: A Comparative View' [1993] 52 CLJ 225
at 227.
See Barclays Bank v Simms [1980] QB 677.
103
(1995) 7 BOND L R
payment. They concentrated on the fact of unjust enrichment and rejected the
argument that such a mistake, of itself, was insufficient.
(a) Supposed Liability
It is not necessary to show the plaintiff had supposed that he or she was
legally liable to make the payment before recovery is allowed. Having decided
that the fact and law distinction is unsatisfactory, it would be ludicrous to
reintroduce via the back door the requirement that the mistake must be one as
to legal liability. This argument is made stronger by the fact that the recent
judicial trend is simply to ask whether the mistake caused the payment. If so,
then restitution is prima facie available.40
(b) Fundamentality
The requirement as to fundamentality adds little to the requirement that
the mistake caused the payment. The real question is whether the mistake
caused the payment. This was the approach taken by Barclays Bank Limited v
W J Simms and Sons41 and approved by the majority in David Securities.42 Goff
and Jones43 have also argued that it is unnecessary for the mistake to be
fundamental. This approach is surely correct because in seeking restitution for
mistaken payments, we are not seeking to undermine expectations created by
a contract but, rather, to prevent unjust enrichment. To require the mistake to
be fundamental would only serve to focus the attention on the nature of the
mistake rather than on the fact of enrichment.
Birks44 has suggested, however, that this requirement of fundamentality
is a worthwhile precaution against a potential flood of claims and for the
protection against insecurity of receipts. The writer does not does not agree
with this view because not only is the concept of 'fundamentality' vague and
lacking in specificity as a working criterion for the kind of mistakes that would
ground a right of recovery, its non-requirement does not necessarily mean that
there would be a floodgate of claims based on mistake of law. Fundamentality
of the mistake has not been a requirement for the recovery of payments made
under mistake of fact and yet there does not seem to be any concern for
floodgate claims and insecurity of receipts, so why should payments made
under a mistake of law be given a different treatment? If the plaintiff can
successfully show that he or she would not have made the payments but for the
mistake, that is, the mistake caused the payment, then the defendant should
prima facie be required to return the payments to the plaintiff on the ground that
it would be unjust for the defendant to be enriched at the expense of the
40
41
42
43
44
104
See, for example, Barclays Bank Ltd v Simms [1980] QB 677, per Goff J (as he then was); Bank of
New South Wales v Murphett [1983] VR 489; Royal Bank of Canada v LVG Auctions Ltd (1985) 12
DLR (4th) 768 and, David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR
353.
[1980] QB 677.
(1992) 175 CLR 353 at 378 and at 395, per Brennan J.
The Law of Restitution (3rd ed, 1986, Sweet and Maxwell) at 89.
Birks, Introduction To The Law of Restitution, Clarendon Press, Oxford, 1985 at p 159; see also the
views of Beatson, The Use and Abuse of Unjust Enrichment , Clarendon Press, Oxford, 1991 at p 150.
MISTAKEN PAYMENTS - THE RIGHT OF RECOVERY AND THE DEFENCES
plaintiff's mistake. The test for mistake is therefore a simple one of causation.
The plaintiff bears the burden of proving that the mistake caused the payment.
The unjust factor
Dawson J P in his article 'Restitution Without Enrichment'45 said that the
general idea of unjust enrichment 'has the peculiar facility of inducing sober
citizens to jump right off the dock'. The ideal of preventing unjust enrichment
has a strong appeal to justice but it also has the 'delusive appearance of
simplicity'. Those who are sceptical to the principle of unjust enrichment might
say that the principle is vague and allows 'palm tree' justice. However, one must
bear in mind that, in order to establish a successful claim in restitution, the
plaintiff must prove not only an enrichment (which is easy in the case of money)
but also an unjust factor on which the right to restitution is based, that is, the
benefit must have been conferred by mistake, under compulsion, duress, undue
influence or out of necessity and other legal grounds before a right of recovery
can be established.46
It has been argued that the plaintiff must prove, in addition to the
mistake, some other unjust or unconscionable factor which would compel the
defendant to make restitution. This argument was advanced by the defendant
in David Securities but the court said that it is not legitimate to determine
whether an enrichment is unjust by reference to what is fair and just. To adopt
this approach, they said, would have 'important consequences in relation to the
elements of the action which the plaintiff must plead and prove. It also appears
to proceed from the view that in Australian law unjust enrichment is a definitive
legal principle according to its own and not just a concept'.47 In order to obtain
restitution, they said, what is important is to focus on vitiating factors such as
mistake, duress or illegality. With respect, this approach is sound because a
requirement of a superadded unjust factor based on a subjective judicial
determination of what is fair and just is to deny the force of the obligation
imposed by the legal concept of unjust enrichment. In the case of mistake, the
fact that the payments were made under a mistake is sufficient to give rise to
the unjust factor and thus gives rise to a prima facie obligation to make
restitution.48 The mistake vitiates any intention on the part of the payer to give
the money to the payee and it is that mistake which gives rise to a prima facie
right to restitution.
Defences
A plaintiff is entitled to a prima facie right to restitution once a mistake
45
46
47
48
(1981) 61 BULR 563
Goff and Jones have listed a number of situations where the enrichment is not unjust: The Law of
Restitution (3rd ed, Sweet and Maxwell, 1986) at 29.
(1992) 175 CLR 353 at 378. By rejecting the argument of the defendant, the majority seems to be
rejecting the claim that the unjust enrichment principle gives rise to a cause of action in unjust
enrichment.
See Australia New Zealand Banking Corporation Group Ltd v Westpac Banking Corporation (1988)
164 CLR 662 at 673.
105
(1995) 7 BOND L R
has been established. This prima facie rule is of course subject to available
defences. The defences barring recovery for payments made under a mistake
of fact are set out in the judgment of Goff J in Barclays Bank v Simms49 but, for
the purposes of this paper, the writer will focus only on the defences of 'bona
fide purchase' and 'change of position'.
(a) Bona Fide Purchase
Clearly if a defendant has given consideration for the benefits, then it
would not be unjust for the defendant to retain the benefits obtained. It could
of course be argued50 that if one had known that payments made pursuant to
contractual provisions would be void, one would have negotiated different
terms to ensure that one would receive an equivalent net benefit. The argument
is that the plaintiffs have received the benefit of the agreement and to allow
recovery would mean a windfall to the plaintiffs. The problem with this
argument, however, is that not only is it retrospective and premised upon
having the benefit of hindsight, it also ignores the fact that the plaintiff's
agreement to pay was given under a mistake. Where payment is made pursuant
to a contractual term that is subsequently held to be invalid, it is necessary to
look at the terms of the agreement closely in order to discover what the payer
expects to receive by way of consideration for the payment. If a payer agrees
to pay money pursuant to a term of a contract on the assumption that it was a
valid term, that payment is vitiated by mistake. The defendant in David
Securities argued that as a matter of formation of a contract, the plaintiff had
accepted the defendant's offer concerning the payment of the withholding tax.
The High court, with respect, correctly concluded that it was not concerned
with an objective assessment of what a hypothetical, experienced commercial
person believed he or she was contracting for; rather, it must ask what the payer,
in all the circumstances, thought he or she was receiving as consideration.
What does 'consideration' in this context mean? The majority in David
Securities referred to decisions such as Rowland v Divall51 and Rover
International v SP Cannon Film Ltd52 and said that in the context of total failure
of consideration, the failure is judged from the perspective of the payer in that
he must not have received any part of the performance bargained for. The court
was of the view that in order to succeed, the bank must prove that the plaintiff
was not entitled to restitution of the payments which it sought to recover;
otherwise, the plaintiff would gain a windfall in the process.
It is necessary, however, to distinguish between the concept of total
49
50
51
52
106
[1980] QB 677 at 695.
On the facts of David Securities, the defendant argued that it had agreed to lend money to the
appellants at the rate named in the loan agreement because of the plaintiff's agreement to pay the
'additional amounts' pursuant to clause 8(b) of the agreement. If it had known that these additional
payments would be void, then it would have negotiated a different interest rate with the defendant to
ensure that it would receive an equivalent net amount. The consideration for a lower interest rate was
the plaintiff's agreement to pay the additional amount.
[1923] 2 KB 500.
[1989] 1 WLR 912.
MISTAKEN PAYMENTS - THE RIGHT OF RECOVERY AND THE DEFENCES
failure of consideration as an unjust factor and therefore a ground for restitution
and the provision of consideration by the defendant as a defence to a prima facie
right to restitution on the ground of mistake. Surely in the latter case, the
concept of total failure of consideration is irrelevant. The onus is on the
defendant to show that it had provided consideration for the benefit conferred
by the plaintiff. 'Consideration' here includes mutual consideration or promises
sufficient to make a bargain binding. In the former case, the onus is on the
plaintiff to establish that it is entitled to restitution for the benefits it had
conferred on the defendant because the defendant had not provided any part of
the bargain promised by it to the plaintiff.
The majority in David Securities has, with respect, confused these two
concepts of 'consideration'. In cases of mistaken payments, the payer is entitled
to a prima facie right of restitution as soon as the payment has been made
because the payer would not have made the payments but for the mistake. The
payee is unjustly enriched at the time of payment. However, in the case where
payments are made for consideration that has totally failed, the payer is not
entitled to recovery at the time of payment. He can only recover in a situation
where he or she can prove that he or she has not received any part of the
performance bargained for under the contract pursuant to which payments were
made. The writer is therefore of the view that payments made under a mistake
and payments made for a consideration that has totally failed are distinct
grounds upon which recovery of payments are available.53
Butler P,54 however, has argued that acceptance of the principle of
failure of consideration as the basis for the recovery of mistaken payments
would 'unify and simplify the underlying basis of the action for recovery of
money wrongly withheld.'55 One of the examples he used is the case of J & S
Holdings v NRMA Insurance56 where the Full Court of the Federal Court held
that the plaintiff payer who had paid excess interest under a loan agreement
could not recover that payment because the money was paid under a mistake
of law. Both parties to the said agreement were in ignorance of the existence of
a relevant statute which rendered void a provision in the agreement providing
for an interest rate higher than a certain rate. Butler has said that:
the intention of the payer and payee in making and receiving the payments
could be considered to be to discharge the legal indebtedness arising under the
loan agreement. In relation to the excess interest paid there was a failure of
consideration for which there could be recovery.57
To base the recovery of mistaken payments on the ground of failure of
consideration makes artificial rather than simplifies the basis of their recovery.
53
54
55
56
57
Brennan J in David Securities was clearly of the view that it is 'a fallacy to conflate the two categories
and to find a total failure of consideration to be an element common to both': (1992) 175 CLR 353
at 390.
Butler P, 'Mistaken Payments, Change of Position and Restitution' in P D Finn (ed) Essays on
Restitution (1990) at 96.
Ibid at p 122.
(1982) 41 ALR 539.
Above n 54.
107
(1995) 7 BOND L R
But for the relevant statutory provision disallowing the excess interest payments,
the interest payments made were supported by the consideration of loan. Both
parties had mutually agreed on the terms of the contract. The payments were
made in performance of the loan agreement. It is incorrect to say that the excess
interest paid was unsupported by consideration. The lender had agreed to grant
the loan upon the agreement by the borrower to pay interest at the stipulated
interest rate. However, to the extent that the interest payable under the
agreement exceeded that payable under a certain rate as provided by the statute,
the excess payments were made under a mistake of law. The borrower had
mistakenly believed that the stipulated interest was legally enforceable by the
defendant payee. Thus, at the time of payment, the payee was unjustly enriched.
If the law is such that recovery for payments made under a mistake of law is
irrecoverable, then the plaintiff payer would be unsuccessful in his claim for
recovery. The argument that recovery should have been allowed on the ground
of failure of consideration is unconvincing.
Would the argument be stronger on facts similar to Pavey & Matthews
v Paul?58 In summary, that case involved an oral agreement between the
plaintiff builder and the defendant land owner. The builder had agreed to carry
out certain building work for the defendant owner of land at a reasonable price.
After the building work had been carried out, the defendant refused to pay the
plaintiff. As the agreement between the parties was entirely oral, the contract
could not be enforced by virtue of s 45 of the Building Licensing Act 1971
(NSW). Butler has argued that the law imposes a duty on the land owner to pay
the builder a reasonable value for the benefit conferred. Although the oral
contract may not be enforceable 'the court will not be precluded from enforcing
the obligation to pay the value of the benefit rendered for failure of
consideration.'59 The function of the agreement was to show that the services
rendered were not intended to be gratuitously rendered. One important point
could be made on this analysis: if the court could enforce the obligation to pay
a reasonable value for the services rendered would that amount to enforcing the
oral contract? If so, would that not be subverting the intention of the relevant
statute? On the facts of Pavey, the court rightly, in the writer's view, granted
restitution to the plaintiff on the ground that the land owner had requested and
freely accepted the services rendered and, more importantly, it recognised that
an order of restitution would not have been against the intention of the relevant
statute. Mason and Wilson JJ in that case said the purpose of s 45 of the Act
includes:
the protection of the building owner against a claim by a builder on a written
contract that fails to describe the building work sufficiently, even in a case
where the builder has fully executed the contract on his part. But it would be
going a very long way indeed to assert that the statutory protection extends to
a case where the building owner requests and accepts the building work and
declines to pay for it on the ground that the contract fails to comply with the
60
statutory requirements.
58
59
60
108
(1987) 162 CLR 221.
Above n 54 at p 123.
(1987) 162 CLR 221 at p 229.
MISTAKEN PAYMENTS - THE RIGHT OF RECOVERY AND THE DEFENCES
The decision in Pavey can therefore be explained on the basis of an
acceptance of a bargained-for benefit and not necessarily on the basis of a total
failure of consideration.61
It seems that a 'common sense' approach is to be adopted in pleading the
defence of bona fide purchase. In Lipkin Gorman v Karpnale Ltd,62 Lord Goff
considered whether the supply of chips to Cass in that case constituted the
provision of consideration.63 His Lordship gave an example of chips being used
in a shop on the same basis as chips used in the casino. He said that when the
shop gave customers chips in exchange for cash, the transaction was to be
analysed as a gratuitous deposit and the shop gave no consideration for the
money proffered by the customer. This approach, Lord Goff said, is preferable
to a technical approach which would see consideration by the shop in the form
of a promise to repay the sum received subject to a purchase of goods by the
customer from the store. This has significance for banks and other financial
institutions because it means that when customers deposit money in their bank
accounts (and this money was mistakenly paid to the customer in the first
place), the fact of deposit does not mean that the bank has given any consideration
for the money. The bank would have to return the money (even if another
account of the customer is overdrawn) unless it can plead the defence of change
of position.
(b) Change of Position
Another possible defence to a claim for restitution is that the defendant
payee has received the money in good faith and has changed its position in
reliance of the receipt of the benefit conferred. The majority in David Securities,
while envisaging the change of position defence, noted that this defence has not
yet been accepted in Australia.64 The House of Lords has already accepted this
defence in Lipkin Gorman v Karpnale Ltd65 although their Lordships had
declined to define the scope of the defence. They simply said that restitution
would be denied if circumstances had so changed that it would be inequitable
to require the defendant to make full restitution.
61
62
63
64
65
While money is considered to be incontrovertibly beneficial, services are not necessarily of value to
the recipient. Where, however, the recipient has requested or freely accepted them, knowing that they
were not being rendered gratuitously, having had an opportunity to reject them, they will be regarded
as a benefit - she or he must make restitution for their reasonable value. See, for instance: Goff and
Jones, The Law of Restitution (3rd ed, Sweet and Maxwell, 1986) at 8; Way v Latilla [1937] 3 All ER
759. Birks, Introduction To The Law of Restitution, p 265, also 104, 114-6, has shown that free
acceptance enables a person seeking restitution to prove both that there has been 'an enrichment' and
further, that it was an 'unjust' one. It is an 'enrichment' because the recipient cannot rely on arguments
saying that it was of no value to her. By accepting them in circumstances where she knew they were
to be paid for, and having failed to avail herself of the opportunity to reject, the recipient has shown
that the services were of value to her. Further, by having failed to reject them, and having had the
benefit of the services without having paid for them, the enrichment is 'unjust'.
[1991] 2 AC 548.
The notable point is that s 18 of the Gaming Act 1945 rendered void contracts gaming and waging
contracts.
Although the High Court had made strong indications of its acceptance in Australia New Zealand
Banking Group Ltd v Westpac Banking Corporation (1988) 164 CLR 602 and Mason CJ in the recent
case of Commissioner of State Revenue v Royal Insurance Australia Limited (1994) 264 CLR 1 seems
to have, in his judgment, assumed the availability of this defence.
[1991] 2 AC 548.
109
(1995) 7 BOND L R
One central uncertainty that remains, given the acceptance of the
defence, is the basis upon which the defence lies. Is it reliance-based, enrichmentbased or hardship-based?
In New Zealand, s 94B of the Judicature Act 1908 provides that relief
should be denied in whole or in part
if the person from whom relief is sought received the payment in good faith
and has so altered his position in reliance on the validity of the payment that
in the opinion of the court, having regard to all possible implications in respect
of other persons, it is inequitable to grant relief, or to grant relief in full, as the
case may be.
The effectiveness of this provision has been criticised by Sutton on the
basis that it is vague and creates confusion 'so great that the court is left merely
making ex gratia payments with other people’s money'.66 The case of Thomas
v Houston Corbett & Co67 illustrates the arbitrariness of the defence. Although
the provision seems to allow the payee a defence on a reliance basis, the court
in Thomas focused more on the issue of apportioning loss between the parties,
having regard to all the facts and the relative equities of both the payer and the
payee.
The New Zealand provision and its application in Thomas has prompted
criticism from the Law Reform Commission of British Columbia and the New
South Wales Law Reform Commission68 but the Law Reform Committee of
South Australia69 has recommended in 1984 the adoption of the provision
subject to a requirement that the alteration of position should flow from the
mistaken payment.
In Lipkin Gorman, the House of Lords said that restitution would be
denied if circumstances had so changed that it would be inequitable to require
the defendant to make full restitution:
... the defence is available to a person whose position has so changed that it
would be inequitable in all circumstances to require him to make restitution,
70
or alternatively to make restitution in full.
Reference to 'inequitability' seems to suggest that the defence is hardshipbased; that is, the defence would be available to the payee if it would be
inequitable to require payment in the circumstances. Lord Goff gave the
66
67
68
69
70
110
RJ Sutton, 'Mistake of Law - Lifting the Lid of Pandora's Box' in J F Northey ed, The A G Davis
Essays in Law 218 at 223-5.
[1969] NZLR 151.
Law Reform Commission of British Columbia Report on the Recovery of Unauthorised
Disbursements of Public Funds (1980); New South Wales Law Reform Commission, Restitution of
Benefits Conferred Under Mistake Of Law, Report LRC 53. Note that the Western Australian
legislation of the Property Law Act 1969, s 125 (1) is very similar to the New Zealand provision
except that regard is not to be had to the position of the payer and those who acquire rights or
interests through him or her.
Law Reform Committee of South Australia, Report Relating to the Irrecoverability of Benefits
Obtained by Reason of Mistake of Law (SALRC 84) 24-27.
[1991] 2 AC 548 at p 579.
MISTAKEN PAYMENTS - THE RIGHT OF RECOVERY AND THE DEFENCES
example where money paid under a mistake of fact is given to charity by the
payee. In such circumstances, it would be unjust to require the payee to make
restitution to the extent that he has so changed his position. Similarly, if a thief
steals money and gives to a third party who gives the money to charity, the third
party has a good defence to the money had and received.
The House of Lords' approach follows that of the United States, as set
out in paragraph 142(1) of Restatement of the Law of Restitution. This provision
focuses on whether or not it would be unjust to compel the payee to repay the
money in the circumstances. The paragraph provides as follows:
The right of a person to restitution from another because of a benefit received
is terminated or diminished if, after the receipt of the benefit, circumstances
have so changed that it would be inequitable to require the other to make full
restitution.
This definition of the defence applies in situations where, for example,
money is paid by a bank under mistake to a payee and the money is stolen from
the payee soon upon receipt. It would be inequitable to compel the payee to
repay the money to the payer when the payee has not even had the benefit of
the payment. The courts in the United States will weigh the equities between
the parties and will deny a plaintiff a right to recovery on 'patent equitable
considerations'.71 Whilst the denial of recovery based on 'equitable' or 'just'
grounds may sound attractive, it does not assist the court nor the parties
involved in ascertaining whether in a given a set of facts, recovery will be
denied. Is recovery to be denied because it would be more unjust to compel
restitution than it is to allow the recipient to be enriched due to the payer's
mistake? If that is so, when does that situation arise? Which of the many
conceptions of justice is being invoked?72
The majority in David Securities said that if payments made under
mistake of law are prima facie recoverable, in the same way as payments made
under mistake of fact, a defence of change of position is necessary to ensure that
enrichment of the recipient is prevented only where it would be unjust.73 This
does not mean that one is required to shift the primary focus on the concept of
unjust enrichment from the moment of enrichment. It means that 'the defence
of change of position is relevant to the enrichment of the recipient precisely
because its central element is that the recipient has acted to his or her detriment
on the faith of the receipt.'74 They were therefore of the view that a defence of
change of position is necessary to ensure that enrichment of the recipient of the
payment is prevented only in circumstances where it would be
unjust.75 Consequently, a prima facie right to restitution will be denied if its
order would cause a greater injustice to the defendant, who has acted to his or
her detriment on the faith of the receipt, than the injustice being suffered by the
71
72
73
74
75
Bank of New York v Simmons & Co (1921) 190 NYS 602.
See Birks, Restitution - The Future (The Federation Press, 1992) at pp 127-128.
(1992) 175 CLR 353 at 385.
Ibid.
Ibid.
111
(1995) 7 BOND L R
plaintiff who has conferred the benefits under unjust factors such as mistake.
The purpose of the defence is therefore to balance the relative equities between
the parties.
A prima facie entitlement to restitution cannot be denied merely
because of subjective notions of unfairness to the payee. As Lord Goff
indicated in Lipkin Gorman a court 'cannot carte blanche reject (the payer's)
claim simply because it thinks it unfair or unjust to grant recovery'.76 The court
must consider all the circumstances and weigh the equities between the parties
in deciding whether the receipt by the defendant would indeed result in an
unjust enrichment.77
It would be unfortunate if the defence's main focus is solely based on the
hardships of the parties. It is clear that the defence should not be allowed simply
because the recipient has spent the money. An example is where the recipient,
who loves gambling and gambles regularly, puts his own money in a fixed bank
account after he has received the money from the payer. He then gambled,
unsuccessfully, the entire payment from the payer. It might be argued that it
would be harsh to require him to make restitution from his own savings because
he would lose interests which he could have earned from the fixed account. In
such cases, the defence of change of position should not be allowed. The
question that must be asked is whether the recipient would have spent the
money on gambling but for the receipt from the payer. The expenditure must
flow as a result of the payment. The recipient in this example would very likely
have spent his own money on gambling even if he had not received the payment
from the payer. It is suggested that the following elements must be shown
before the defence is successfully established:
76
77
78
112
1.
The recipient is no longer 'enriched' at the time of demand of
repayment because the recipient has acted to his or her detriment
on the faith of the receipt; or because the enrichment has been
taken away from him or her in circumstances beyond his or her
control;78
2.
The recipient's change of position is as a result of the enrichment;
and
3.
It would be more unjust, in the circumstances, to require the
recipient to make restitution than the fact of unjust enrichment
in the first place.
[1991] 2 AC 548 at p 578.
In the United States and Canada where the defence has been firmly accepted, the courts have denied
restitution where the defendant has been at fault, for example, where the defendant has changed his or
her position after the mistake was discovered: E R Squibb & Sons v Chemical Foundations (1937) 93
F 2d 475. In Lipkin Gorman, the House of Lords said that mere expenditures by the defendant does
not on its own constitute a change of position: [1991] 2 AC 548. If the defendant payee had acted in
bad faith or knew that the payment was paid under mistake by the payer, then the defence of change
of position will be denied: see further Goff and Jones, above n 10 at 125.
This formulation is intended to cover cases where money has been mistakenly paid to the payee from
whom a thief steals it.
MISTAKEN PAYMENTS - THE RIGHT OF RECOVERY AND THE DEFENCES
This approach focuses on the question of enrichment, that is, is the
recipient in fact enriched? A recipient whose money from the mistaken
payment is stolen by a thief is, although enriched at the time of payment, clearly
not enriched in the real sense in that he or she did not in fact enjoy the fruits of
the enrichment. The question of enrichment is one of fact.
The change of position must flow as a result of the enrichment. Even if
a recipient is in fact enriched and has changed position because of the
enrichment, one must ask whether that change of position is as a result of the
enrichment. A person who had planned a holiday and who had been saved
expenses because of the unjust enrichment cannot claim to have changed his or
her position. The expenses were already expected and it was not money which
would not have been spent but for the enrichment. An example where the
change of position is as a result of the enrichment is the situation where the
recipient gives the money received, whether in whole or in part, to charities.
Another example would be where, on the faith of the receipt, the recipient uses
the money to renovate the kitchen in the house which he or she would not
otherwise have done. What if the receipt resulted in the recipient buying a more
expensive car or house than he or she could otherwise afford? Clearly, if money
had been given to charities and the gift is on the faith of the receipt, it would be
unjust to require repayment. If the money had gone towards buying a more
expensive commodity than the recipient could otherwise afford, should the
defence be available? In Lipkin Gorman, the House of Lords gave a similar
example where money had been spent to buy a car which the recipient would
not have bought but for the receipt. The recipient is said to have changed his or
her position on the faith of the receipt and has only been unjustly enriched to
the extent of the second-hand value of the car at the time when restitution was
sought.79 If the recipient buys a more expensive car than what he or she would
otherwise have bought, for example, instead of spending $20,000 on a car, the
recipient spends $40,000, what is the extent of his or her enrichment? Presumably,
the same principle above will apply. The extent of the unjust enrichment will
be the proportion of the second-hand value of the car at the time restitution is
sought that is equal to the proportion of the contributions at the time of
purchase. If the second-hand value is, say, $30,000, then the extent of the unjust
enrichment is 20,000/40,000 x 30,000 which is $15,000.
Finally, the court should take into account all the circumstances and
decide whether, as a matter of fact, it would be more unjust to require
restitution. For instance, to require restitution would be more unjust than the
fact of unjust enrichment in a case where a recipient has received money in good
faith and has spent it, in reliance of the receipt, on a new kitchen and the only
way restitution could be achieved would be to require the recipient to sell that
house. On the other hand, it may not be unjust to require this of a recipient who
is in a similar situation but who was already planning to sell the house anyway.
In the latter case, it is not particularly unjust to require the recipient of the
enrichment to restore to the payer the equivalent sum paid by mistake.
79
[1992] 2 AC 548, at 560.
113
(1995) 7 BOND L R
This final requirement might be criticised on the ground that 'unjust' is
a vague word and therefore there is danger of 'palm-tree' justice. This criticism
can be met by the point that the notion of 'unconscionability' is an equally vague
and emotive concept and yet the courts have not shied away from its application
in other areas of the law.80 The concept of what is 'unjust', in the context of the
change of position defence, is not as unruly as one might first imagine. It is to
be assessed in the circumstances of the case, taking into account whether the
recipient has in fact been enriched, whether he or she has spent the money in
whole or in part in reliance of the receipt and whether it would be unjust, overall,
to require restitution. Lord Goff in Lipkin Gorman indicated quite clearly that,
in recognising the defence, he wished to allow it to develop on a case by case
basis. It is understandable that the court should wish to refrain from a definition
of the defence at such an early stage. Given the fact that it is now possible to
recover money paid under a mistake of law as well as mistake of fact, it is
becoming important for the mistaken payer to know the circumstances in which
his or her prima facie right to restitution will be denied. The suggested test
discussed above has the merit of producing some certainty but at the same time
allowing the court to look at the availability of the defence on a case by case
basis.
The House of Lords in Lipkin Gorman said the defendant will not be
successful in establishing the defence of change of position if he or she has
acted in bad faith. If, at the time of receipt, the recipient knew or ought to have
known that he or she was not entitled to the payment, then the receipt would not
have been in good faith. The House went on to say that the mere fact that the
defendant has spent the money does not itself render it inequitable that he or she
should be called upon to pay.81 In David Securities, the majority were clearly
of the view that a defendant cannot rely on the change of position defence
'where he or she has simply spent the money received on ordinary living
expenditures'82 but no indication was given as to what would amount to
'ordinary living expenses'. It has been suggested that no distinction should be
made between ordinary expenses and extraordinary expenses - all that is
required is that the defendant would not have spent the money but for the
receipt.83 Whilst the writer agrees that the focus should be on the circumstances
in which the money was expended rather than on the nature of the expenses, the
reference to such 'ordinary living expenses' is nevertheless useful to show that
the expenditure of the money must be caused by the mistaken payments. If the
defendant usually spends $100 per week on groceries but spends $200 on one
occasion because he or she has been mistakenly paid money by the payer, the
questions ought to be whether he or she incurred the expenses in consequence
80
81
82
83
114
Unconscionability underlies many of the vitiating factors (eg mistake, duress, undue influence) to an
apparently valid contract. It is also an important factor in estoppel cases: see Walton Stores
(Interstate) Ltd v Maher (1988) 164 CLR 387.
This is based on the statements expressed by Lord Simonds in Ministry of Health v Simpson [1955]
AC 251 where it was decided that money wrongfully given to charities from legacies cannot be traced
against such charities when they have spent the money on alterations to buildings.
(1992) 175 CLR 353 at 386.
Burrows, The Law of Restitution (Butterworths, 1993) at 428; Bryan, 'Mistaken Payments and The
Law of Unjust Enrichment: David Securities Pty Ltd v Commonwealth Bank of Australia', (1993) 15
Syd LR 461 at 487.
MISTAKEN PAYMENTS - THE RIGHT OF RECOVERY AND THE DEFENCES
of the payment and whether it would be unjust to require the defendant to repay
the money in the circumstances.
(c) Change of Position and Estoppel
From the position of the recipient, what is the advantage of a defence of
change of position given the developed doctrine of estoppel in Australia? In
Walton Stores (Interstate) Ltd v Maher,84 Brennan J said that an estoppel arises
when:
A party who induces another to make an assumption that a state of affairs
exists, knowing or intending the other to act on that assumption, is estopped
from asserting the existence of a different state of affairs as the foundation of
their respective rights and liabilities if the other has acted in reliance on the
assumption and would suffer detriment if the assumption were not adhered
85
to.
In the case of estoppel as a defence to restitutionary claims based on
mistake, the fact of payment made under a mistake is not disputed nor the fact
that the payee is in receipt of a benefit, it simply denies recovery in the
circumstances of the case on the basis that the plaintiff is estopped from
denying that the defendant is entitled to the payment. As far as the recipient is
concerned, there is no advantage in pleading the defence of change of position.
The defence of estoppel is clearly a more attractive defence to the defendant
because, unlike the defence of change of position, the estoppel defence does not
operate pro tanto.86 If the defendant successfully establishes the defence, he or
she is not required to make any repayments to the plaintiff.
In order to plead a successful defence of estoppel, however, the payee
must satisfy three basic requirements. The first is that the person seeking
recovery has made a representation of fact to the payee which was intended to
be acted upon.87 The second requirement is that the payee relied on that
representation and, thirdly, that the payee has, as a result of the reliance,
changed his or her position in such a way that it would be inequitable to require
him or her to return the money.
The difficulty with estoppel is that the mere payment of money by
mistake is not sufficient to amount to a representation which will estop the
payer from asserting his or her right to receive the payment. The payer must
have represented, whether expressly or by conduct that the defendant is entitled
to treat the money as his or her own.88 It has been suggested that this is no longer
84
85
86
87
88
(1988) 164 CLR 387.
Ibid at p 413.
Avon County Council v Howlett [1983] 1 WLR 605.
Note that even if there is no representation of fact, the plaintiff may nevertheless be estopped if he or
she has been guilty of a breach of a duty to give accurate information which he or she owed to the
defendant: see, for example, R E Jones Ltd v Waring & Gillow Ltd [1926] AC 670, per Lord Sumner
at 693; Weld-Blundell v Synott [1940] 2 KB 107, at 114 per Asquith J.
Transvaal & Delagoa Bay Investment Co v Atkinson [1944] 1 All ER 579, per Atkinson J at p 585.
See also: R E Jones Ltd v Waring & Gillow Ltd [1926] AC 670.
115
(1995) 7 BOND L R
a tenable requirement given the development of the estoppel doctrine in
Australia.89 Whilst it is true that a representation need not be verbal and that a
representation by conduct would suffice, there is still a requirement of a
representation made in order to establish a case of estoppel. The defendant
cannot argue that the plaintiff is estopped from denying something when the
plaintiff has done nothing to justify that claim. Even if one adopts a wide
doctrine of estoppel as that taken by Brennan J in Waltons Stores (Interstate)
v Maher90 where his honour omitted any references to representations,91 his
honour still required that the plaintiff, by his conduct, induced the defendant to
adopt a certain assumption or expectation. Where a payment is made under
mistake, whether it be one of fact or of law, whether the fact of payment carries
an inherent representation that the recipient is entitled to the payment depends
on whether the payer is under a duty of accuracy. It is submitted that banks are
not under any duty of accuracy to the payee just as they do not owe a duty of
care to the holder of a cheque. The mere payment by the bank therefore does
not carry an inherent representation of entitlement. The requirement of a
representation is even harder to satisfy where the plaintiff is not the payer of the
money. So, in cases where the plaintiff is a next-of-kin who is claiming money
paid by mistake by the executor to a legatee (who was not entitled to receive the
money), the payment by the executor will usually involve no representation by
the plaintiff and thus no estoppel will arise against the plaintiff.92
The first requirement of a representation, whether by word or conduct,
therefore limits the availability of estoppel as a defence to innocent recipients
of money paid under mistake.
As noted earlier, the defence of estoppel is a better defence for the
defendant simply because it cannot operate pro tanto so that if, for example, the
defendant has innocently changed his or her position by disposing of part of the
money, a defence of estoppel would provide him or her with a defence to the
whole claim. It has been suggested that developed doctrine of estoppel in
Australia now allows the defence to operate pro tanto.93 The whole basis of this
pro tanto rule is that estoppel is a rule of evidence which precludes the plaintiff
from denying certain facts inconsistent with his or her conduct. If the defence
can be established, it operates as a defence to the whole claim by the plaintiff.
Although the High Court in David Securities seemed to assume the correctness
of the Avon County Council’s case, Mason J in Commonwealth v Verwayen94 had
said that the defence of estoppel by conduct has expanded from an evidentiary
function to a substantive doctrine. There is therefore little justification for
89
90
91
92
93
94
116
See: Bryan, 'Mistaken Payments and The Law of Unjust Enrichment: David Securities Pty Ltd v
Commonwealth Bank of Australia' (1993) 15 Syd L R 461 at 487.
(1988) 164 CLR 387.
See: Bryan, above n 89 at 489.
See, for example, Re Diplock [1948] Ch 465. That was a case involving tracing and the charities in
that case were innocent recipients of money paid under a mistake, the court therefore allowed them to
retain the money paid on the ground that they had changed their position because of the payment.
See Bryan, 'Mistaken Payments and The Law of Unjust Enrichment: David Securities Pty Ltd v
Commonwealth Bank of Australia' (1993) 15 Syd LR 461 at 488 who suggests that the two defences
should merge and form a single defence of injurious reliance.
(1990) 170 CLR 394 at 412.
MISTAKEN PAYMENTS - THE RIGHT OF RECOVERY AND THE DEFENCES
insisting that the defence of estoppel should not operate pro tanto. If the
defendant is able to return what remains of the mistaken payments, it does not
seem appropriate that he or she should be able to retain the remainder on a
successful defence of estoppel. The defendant in such circumstances would
still have gained an unjust enrichment.
The defence of change of position offers a more appropriate protection
to an innocent recipient of the payments who has received the money in good
faith and who has changed his or her position in consequence of the mistaken
payments. It is also more of an equitable defence as far as the payer is concerned
because it is a pro tanto defence; the defendant is still required to repay the
payer the money that has not been spent. As between the payer and the payee,
it is a question of fact, as between the injustices of the plaintiff and the
defendant, who should bear the loss. If the defendant has changed his or her
position by disposing only part of the payments and is in a position to return
what remains, then it would not be unjust to require him or her to return the
remaining money to the mistaken payer. It may be that the defence of estoppel
should not be available as a defence to restitutionary claims altogether.
Conclusion
The High Court has, via Pavey and Matthews v Paul95 and David
Securities’, removed any doubt that in Australia the principle of unjust
enrichment is a principle which explains why a right to restitution is required
in some cases and a prima facie right to recover mistaken payments irrespective
of whether the mistake was one of fact or of law is an example of the application
of this principle. The High Court in David Securities has made a distinction
between mistaken payments and voluntary payments. There is a danger that the
wide definition of the word 'voluntary' may overshadow the advantage of
removing the fact and law distinction. This can be avoided if a number of factors
are taken into account in deciding whether the payment was made either by
mistake or voluntarily:
95
(i)
whether the payer, on the balance of probabilities, had doubts
about the validity of the payment so that it precludes him or her
from relying on mistake;
(ii)
whether the payer had waived his or her right to further
investigation and had chosen to assume a risk of mistake;
(iii)
if the payer was ignorant or did not direct his or her mind to the
validity of the claim or demand, the payment was likely to have
been made under mistake. Negligence of the payer should not
be a bar to the prima facie right of recovery although the extent
of negligence may be taken into account in deciding whether the
payer had assumed a risk of mistake.
(1987) 162 CLR 221.
117
(1995) 7 BOND L R
Given the prima facie right to recovery for payments made under
mistake, it is crucial to protect a bona fide payee who had received the payment
in good faith and who has subsequently changed his or her position. In
Australia, the High Court in David Securities has said that the defence of
change of position would operate to ensure that the plaintiff can only succeed
in cases where the defendant's enrichment is clearly unjust. It is submitted that
whilst it is desirable to balance the equities between the payer and the payee,
the court's focus should be whether the payee has in fact been enriched and
whether the change of position was as a result of the enrichment. It would be
inequitable to the payer to deny recovery simply because it would be unjust to
the payee. The question of whether it would be unjust to compel restitution must
be examined in the context of the payee's enrichment and the causal link
between the payment and the change of position. The issue of 'unjustness' is
relevant as the final consideration in determining whether it would be more
unjust to require restitution than the fact of unjust enrichment in the first place.
Finally, the defence of estoppel which is a better defence for the payee
whilst it is still considered a pro tanto defence, ought not to be available as a
defence to restitutionary claims. Given that restitutionary claims for payments
made under mistake are based on the principle of unjust enrichment, the
defences to such claims ought to focus on the enrichment and the extent of the
change of position as a result of that enrichment.
118